FUNDS: Hungary's VC market benefits from EU cash

By bne IntelliNews August 31, 2010

Robert Smyth in Budapest -

It might have taken a while to put together, but the New Hungary Venture Capital Programme and its eight new European Investment Bank-backed funds have made more than €160m available for small businesses located outside the Hungarian capital, with the managers of the various funds now eying up a string of investments.

Under the EIB's Joint European Resources for Small and Medium-sized Enterprises (Jeremie) programme, which sees EU cash invested via local VC funds, all companies must be younger than five years and most headquartered outside Budapest and the central Pest county. These small and medium-sized enterprises (SMEs) must also have annual revenues of less than HUF1.5bn (€5.4m).

The largest of those eight funds and biggest beneficiary of this EU money will be Finext Startup Kockazati Tokealap-kezelo's first fund. The Jeremie fund is contributing almost €18m, or some 68%, to Finext Startup's first fund. "Overall, it's a very good concept, and with the EU providing around two units of investment to the private investors' one, it means we can look at investing in companies that were previously considered too small due to the risk in early-stage investments," says Ivan Halasz, director of Finext Startup.

Levente Zsembery, head of Biggeorge's-NV Equity Kockazati Tokealap-kezelo, complains that the majority of Hungarian entrepreneurs made their first million in real estate or they invested outside Hungary. "International funds have favoured investing in larger companies, while private investors have invested in real estate," says Zsembery. "Private investors and angel investors were reluctant to tap the start-ups and there have been more opportunities than investors."

However, according to the structure of the Jeremie package, investors now only risk 30% of the value of investments on each investment, which should finally bring institutional cash into smaller, early-stage equity investments and make the VC market for small investments more sustainable.

Peter Tanczos, head of Etalon, one of the funds to which Jeremie contributes, which has now been renamed as Euroventures, notes that all eight Jeremie funds provide access to early stage institutional SME funding, with incentives to make small, innovative equity investments. "The co-investment Jeremie fund, Euroventures IV, provides a unique structure to offer significant leverage to private investors who consider investing their own funds into VC-type opportunities in Hungary."

He also reckons that it is the fact that smaller, early-stage equity investments will be available from institutional sources, rather than a shift in the geographical focus, which is the key differentiator with the Jeremie funds.

However, Halasz has some reservations. "Some of the rules are too stringent, but we're hopeful that some of these problems will be ironed out," says Halasz. "Due to the risk inherent with early stage investments, we need flexibility and currently we don't have the full 'munitions set', in terms of the likes of preference and liquidity rights at our disposal available to non-Jeremie funds." One limitation, for example, is that funds can only be used for capital injections and not for making add-on acquisitions.

First investments

Halasz, a veteran of the Hungarian venture capital scene, says that Finext Startup hopes to close its first two investments in the third quarter. "We are opportunistic in terms of the types of companies we're considering to invest in, but they must have high-growth prospects, a sustainable competitive advantage, strong management, while it's best when they are targeting broader markets than Hungary," he says.

Finext Startup expects to invest in a total of 10-15 companies by the end of 2013, but will consider reinvesting into strongly performing companies. Overall, one company can receive three investments totalling €4.5m over three years.

Biggeorge, which has raised €14.3m through its latest fund with Jeremie contributing €1m of that, is targeting investments in healthcare services, biotechnology and alternative energy, and is close to investing in two or three cases. "We expect to close the first at the beginning of September," says Zsembery. "We've sent out three indicative offers and have two negotiations in progress."

Euroventures is in the due diligence phase with three companies: one in medical research, one in tourism and another in a greenfield manufacturing development sector. "Euroventures is looking for excellent, proven management teams, with a credible business plan that target an existing market demand," Tanczos says.

The Euroventures fund differs slightly from the others. "Normal VC returns are expected from the target companies, but the fund can offer the bulk of its return to the selected private co-investors. This is a unique feature of Euroventures IV, none of the other Jeremie funds have this option," explains Tanczos, adding that the rest of the fund's capital will come from private investors who co-invest on a deal-by-deal basis. "We did not have to offer any exclusivity to anyone: the leverage is offered to the private investor who can provide the most added-value to the investee company or to those who introduce the investment opportunity themselves to Euroventures."

In June, the Primus III Venture Capital Fund, to which Jeremie provides €15.5m of the total €22.2m, made its first investment in ComForce, a northern Hungary-based company dealing with marketing and telecom services, "Our second investment, a medical technology company is closing as we speak," says Zoltan Bruckner, managing director of Primus Capital. "We've signed another term sheet and expect to close our third investment in an innovative advertising company in September."

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